I’ve been watching, and collecting a little data, on the oil curve. Monitoring the March – July, we saw 28% higher prices between those months, when I started making notes. That was only a week or so ago. When the March contract settled, it was near 13%. Now looking at the April – Aug price action, we now have a curve at about 14%.
I think the move higher on oil, will only begin when the curve actually settles down. And we’re seeing that start this week. That is, we won’t see the front month climb at the same rate the later months will, when oil starts to move north. The climb should start, with the front month climbing faster than the later months. Maybe this is obvious to some pros out there, but I’m relatively new to the oil game. Oil only got interesting to me, when we broke ~$60 on the way down. I mean, I followed it with the market, but the coming pop is something I want in on.
My thought process is, that the natural state of the curve should be in slight contango, a curve that equals the cost to store oil + the time value of money. While we have a steep curve, some supply projects can still move forward and push down the back half of the curve. It’s my logic that demand is a “near future” phenomena. And so, when firms plan to consume it, (or not consume it) they are doing so on the front part of the curve. So, the lack of current demand catches up with the back half of the curve, eventually, as time progresses. So, we’ll see the curve lie flat, when supply meets equilibrium, way into the future. Traders, the back half might fall to $40, or the front month might climb to $50, I don’t know. It will only be then, that the market will realize the coming oil shock, and start to move with veracity.
This is my logic, maybe not yours, chime in macro guys, I’m learning here.
No position in oil, or any derivative. (I got stopped out of my USO 2011 calls…phew)